Energy and Agricultural Policy Are Diverging

Chatham, On. Photo by Tammy Foster/Brent Foster Photography     I filled up my gas tank today for $.94 a liter.  In some ways it felt like Independence Day, as that is about the cheapest price I’ve paid for gasoline in quite some time.  The record I have for filling up my pickup truck was a few years at $175.  Felt like I had to mortgage the farm every time I filled it up.  However, even with the Canadian dollar below $.75 US I can now fill up for so much less.  Lower oil prices have certainly helped with the proverbial high cost of fuel.

I think we know quite a bit about the oil market.  Basically, we have too much supply for the demand, which is constantly shrinking.  Demand for gasoline has gone down over time partly because of the energy conservation going on within the industry.  Of course, we have all the new oil supply coming on the market in places like North Dakota’s Bakken range.  Where once we had economists in Canada predicting a $200 a barrel world, the new $40 world of oil has certainly turned a lot of economic assumptions on their head.

Oil is one thing and electricity is another.  In Ontario we have always been aware that we pay too much for electricity, but this week the auditor general chimed in.  She said that Ontario ratepayers paid out $37 billion more than necessary for their electricity from 2006-2014 and will pay an additional $133 billion by 2032.  You can’t store electricity, like you can store oil.  Let’s just say it is a long story with many political villains.  At the present time, Ontario is swimming in electricity, so much so we are exporting it to the US for pennies on the dollar.  Even in that environment we continue to build wind turbines, which will generate electricity we don’t need and sell it for fire sale prices.  Who knew, the demand for electricity would actually decrease over time.

The energy file is always a difficult one for government because it is so essential for our economy.  Over the years governments have made decisions based on the availability of oil.  Electricity has had the same scrutiny.  2015 is so different than 1995 or the 1980s before that.  Back in the day, we were always worried about not having enough and agriculture was seen as being part of the solution.  That’s one reason that biofuels became so in vogue 20 years ago.  That resulted in the renewable fuel standard or RFS in the United States that launched and maintained the biofuel revolution and sent crop prices much higher.

From an agricultural perspective the RFS was and is extremely important for our agricultural prices.  I think in the United States this is conventional wisdom, but not so much here in Canada.  Simply put, up until 2022 the United States has set out the schedule for increased biofuel production.  However, it is also based on gasoline demand and the price of oil etc. etc. etc.  This past week the EPA announced a cut of 20% in the volumes of biofuels required partly because of the reduction in gasoline demand.  That is somewhat negative in the overall sense, but the cuts were not as big as expected.  Needless to say, the RFS remains a very important structural demand component for corn in the United States.

In Canada it is quite different.  For instance, in Ontario the ethanol industry was jumpstarted by a 12-year $520 million infusion of capital known as the Ontario Ethanol Growth Fund.  This was started in 2005 and will end on December 31, 2016 with administration winding down in March 2017.  Essentially, this policy built the Ontario ethanol plants and an industry.  When the funding ends at the end of next year the majority of ethanol plants in Ontario will be on their own.  Ontario gas blended with 5% ethanol will remain.  The program was the child of then Liberal government of Premier Dalton McGuinty.  Since then, the political will for ethanol has disappeared and after the program is over I’m sure you’ll never see anything like that again.  Rising oil prices and decreased demand for energy are weighing in.

It puts crop producers in somewhat of a precarious place.  We have all been hoping for crop futures prices to rise, like it is 2008 again.  However, we are hoping for this in an environment where components of the demand that gets us there like the price of oil and gasoline and the RFS are eroding.  Back in the year 2000, that might have been hard to imagine, but in 2015, it is here in spades.

Of course, this trend may accelerate.  Think of the number of Tesla electric cars you see on the road.  They are no longer an aberration.  Think of the battery technology that is being developed, which likely will replace some fossil fuels.  Think about the climate change agenda and the increasing price of carbon that is being regulated on us in some Canadian provinces.  It is simply changing the game.  Of course, the game we don’t want changed is using crops for biofuel to stimulate demand to create better prices.  Needless to say, that ship might be still strong, but there are competitors on the horizon.  Energy policy may surely abandon agriculture in the future.  A dose of new technology might make it only a moment away.